Welcome to the Dell Inc. first quarter fiscal year 2011 earnings call. (Operator Instructions) I would like to turn the call over to Rob Williams, Director of Investor Relations. Mr. Williams, you may begin.

We just posted information on Q1 results and a VLog with Brian and Brad on our IR site at Dell.com. I encourage you to review these materials. Our upcoming investor relations activities include the Bernstein CEO conference on June 3rd and our analyst meeting here in Austin on June 23 and 24th.

Next I would like to remind you that all statements made during this call that relate to future results and events including statements about Dell’s future financial and operating performance, expected component pricing, global currency volatility and anticipated customer demand are forward-looking statements that are based on our current expectations. Actual results and events could differ materially from these projected in the forward-looking statements because of a number of risks and uncertainties which are discussed in our annual and quarterly SEC filings and in the cautionary statement contained in our press release and on our website. We assume no obligation to update our forward-looking statements.

Please note that on today’s call will be referring to non-GAAP financial measures including non-GAAP gross margin, operating expenses, operating income, net income and earnings per share. These measures are reconciled to the most directly comparable GAAP measures in the slide presentation posted on the Investor Relations portion of our website at Dell.com and our 8K filed today which we encourage you to review. Please note that unless otherwise mentioned all growth percentages refer to year-over-year progress.

Now I would like to turn it over to Brian.

Brian Gladden

Thanks, Rob. We had a solid first quarter in an improving global environment and demand has picked up especially with our commercial customers who make up approximately 78% o our revenue. We had solid unit and revenue growth in the quarter. Solution revenue which includes enterprise servers and networking, storage and our services business was up 38% to $4.2 billion aided by the acquisition of Perot Systems. We also saw very strong demand in the emerging countries around the world.

Our entire commercial business continued to benefit from improved demand and the hard work we have done to improve our cost structure and the critical investments we are making to build out our enterprise business. Our nearly $50 billion commercial business is performing well and this validates our strategy to expand our investments in servers, storage, software and services. Given the strategic importance of our enterprise business we have asked Brad Anderson to share his view on the progress we are making in enterprise solutions and discuss some of the underlying growth we are seeing there.

But first, let’s look at the first quarter P&L and the key performance metrics which are laid out on chart’s five and six in the web deck. Revenue in the first quarter was $14.9 billion up 21% year-over-year and flat sequentially. This is slightly better than our typical historical seasonality. On a GAAP basis operating income was $619 million or 4.2% of revenue and earnings per share was $0.22 which is up 47% year-over-year. On the rest of this call I will refer to non-GAAP financial measures.

Operating income grew 29% to $824 million or 5.5% of revenue. Sequentially, gross margins improved slightly to 17.6% and our OpEx was 12% of revenue. We continue to focus on improving operating income while making key investments in products and in sales and services resources. Net income and earnings per share were both up 20% year-over-year. Net income was $584 million while earnings per share was $0.30 per share.

Our financing and other expenses were $68 million, up versus prior quarter driven primarily by currency valuation of certain balance sheet items due to a strengthening U.S. dollar. Our tax rate was 22.8% and reflects the net benefit of certain effectively settled foreign tax audits. For the year we do expect our tax rate to be in the 27% range consistent with our previous outlook.

We generated $238 million in cash flow from operations and $400 million in free cash flow in the quarter. Over the past four quarters we generated $4.3 billion in free cash flow. As you know the first quarter is typically our weakest cash flow quarter as we make year-end bonus payments during the quarter. We also used about $130 million of cash to build some strategic inventory given the current component environment.

Our working capital performance continues to be solid. Our days receivable were flat with a one day increase in inventory days offset by a one day improvement in days payable keeping our cash conversion cycle at negative 36 days. We do expect our cash conversion cycle to remain consistently in the negative mid 30’s throughout the year.

We ended the quarter with $11.6 billion in cash and investments. During the quarter we reinitiated our stock buyback program with a buyback of $200 million. We have been saying we would like to restart the program as we have gotten more comfortable with the credit markets, our business performance and other strategic cash usage requirements. We expect to continue a modest buyback program for the rest of the year. As part of our ongoing efforts to optimize our capital structure and our U.S. liquidity we are also monitoring the credit markets for possible favorable entry points.

Dell Financial Services generated almost $1 billion in new originations, up 11%. We saw strong leasing demand in large enterprise and in the U.S. in general. The loss rate for our managed portfolio for the quarter was 7.6% which is down 130 basis points from last year as overall portfolio quality continues to improve. At the beginning of the quarter we consolidated two commercial based conduits in accordance with recent changes in U.S. GAAP resulting in a net increase to financing receivables and debt of $609 million and $624 million respectively with minimal changes to retained earnings. This accounting change has no impact on our P&L or cash flow for the quarter.

Turning to our global business unit performance our commercial business grew 22% to $11.6 billion with operating income up 25% to $894 million. We are beginning to see some leverage here and despite the fact we are making significant strategic investments in this part of the company. These results represent the best growth rates we have seen in commercial in the past two years. Large enterprise grew 25% to $4.2 billion. Opinc in this business was up 47% to $283 million and improved to 6.7% of revenue. These results were driven by very strong server revenue growth of 61% in the quarter and good OpEx leverage which we have been counting on as the growth returns.

Client demand is also very strong with desktops and mobility growing 22% and 14% respectively. Our public business grew 22% to $3.9 billion benefiting from the Perot Systems acquisition year-over-year impact. Excluding the impact of the consolidation of Perot we saw muted demand in U.S. federal and our EMEA business. Operating income was up 2% to $298 million or 7.7% of revenue driven by stronger demand in state and local governments and emerging countries.

Servers were up 17% in the quarter. Based on 2009 revenue Gartner recently ranked Dell as the number one healthcare information technology services provide in the world and we are beginning to see more synergy wins in this area. Our small and medium business revenue was up 19% to $3.5 billion. Operating income grew 36% to $313 million or 8.9% of revenue. Our server, storage and client businesses all delivered strong double digit growth in the quarter for small and medium business.

Our consumer business revenue was up 16% to $3.2 billion. Operating income was $17 million as we are just beginning to see some of the cost benefits from consolidating this business with our SMB business. Our goal continues to be to improve operating margins to 1-2% by the end of the year. Regionally we saw solid revenue growth in the Americas and APJ which were up 23 and 33% respectively while Europe, EMEA, grew by 6% in the quarter. Emerging countries continue to grow very quickly with our total revenue from BRIC countries up 60% and now representing nearly 12% of our total revenue in the company.

Moving briefly to a few key product highlights, on top of the strong enterprise growth Brad will talk about we saw strong return to growth in our commercial client business. Revenue in mobility and desktops grew 18% and 13% respectively. Mobility units were up 27% while desktop units were up 12%.

Turning to enterprise, let me turn it over to Brad Anderson to discuss some of the success we are seeing in server storage and services.

Brad Anderson

Thank you Brian. We had a strong enterprise solutions quarter. Our combined server, networking, storage service solutions grew 38% to $4.2 billion. A year ago we said we were going to shift our portfolio to higher margin and recurring revenue and that is exactly what we are doing.

Let me give you some specifics. In servers we were [time] to market on Westmere and Nehalem EX, beating several key competitors to market. We launched a full range of Westmere Blade, Rack and Tower servers, Nehalem EX blade and rack based servers as well as the only scalable two socket server capable of supporting a half a terabyte of memory which is really ideal for databases and virtualization.

Additionally, we shipped the industry’s first portfolio of cloud optimized servers, our Power Edge C series, leveraging our unique learning’s from our data center custom solutions business. All of these provide significant returns on investment as customers consolidate, virtualize and scale their data centers. As a result, we are seeing a surge in server upgrades at higher ASPs. Server revenue was up 39% to $1.8 billion with units up 30% and ASP up roughly 7%.

In storage we are focused on the full information life cycle for data access, data management and data tiering. We expanded our intelligent data management offerings by launching the Dell DX Object Storage Solution for healthcare and archiving and we are expanding our partnership with EMC with the introduction of our Dell EMC de-duplication and NX unified storage solutions.

As a whole, our storage revenue was up 4% to $554 million. EqualLogic and Power Vault led our revenue growth up 78% and 21% respectively. More importantly our storage product mix delivered better contribution margins. On acquisitions, the integration of Exanet and Case are going well. Exanet provides us key file storage technology for our unified storage platform and Case gives us a nice, easy to use system management platform for the mid market.

In networking we launched our first set of Brocade products and this quarter we will add Juniper to our networking mix. Finally, Dell Services grew 53% to $1.9 billion. The integration of Perot is progressing well. We are on target with all the key work streams including cost and revenue synergies. As a combined organization we are competitively strong and are beginning to win business previously entrenched with the competition. We are effectively competing for a broader array of services contracts. We have identified now more than 300 synergy sales opportunities that are now progressing through the sales process.

In addition, both discretionary and outsourcing contract flows are gaining momentum as customers continue to focus on increasing efficiencies, reducing costs and gaining access to more utility based computing technologies. As you can see we are committed to unified business. We are seeing a very strong acceptance of our strategy of open, capable and affordable solutions. We look forward to discussing our approach with you in much more detail in June at the Analyst Meeting.

Now let me turn it back to Brian.

Brian Gladden

Thanks Brad. Before we hear from Michael I would like to provide some additional perspective on the quarter and our views on demand going forward. As Brad described we are experiencing very strong server growth on the heels of launching the Nehalem EX servers before our competitors.

As we indicated last quarter we are also in the early stages of a large corporate client refresh and we believe demand will continue to be relatively strong here. We are primarily a commercial and increasingly an enterprise company. While we have suffered during the past 18 months of weak commercial demand we stand to benefit in this cycle. Based on the first quarter reported IDC results we also fared better in the share metrics than we have in awhile. As we said, we saw resurgence in commercial desktop and mobility demand in the first quarter and that should continue for the next several quarters.

We look forward to the growth here as it drives scale, operating leverage and pulls through higher margin services and SMP business even though it may pressure gross margin for us. For the second quarter we expect seasonal improvements from our state and local government, consumer and education businesses. It is also important to note that the second quarter and the first part of the third quarter are generally periods where we see slower demand from larger commercial customers in the U.S. and especially Europe.

Net for Dell we expect a normal seasonal pick up in the low single digits in the next quarter. We expect some components to remain in tight supply with limited deflation over the next couple of quarters and global currencies to remain somewhat volatile, especially the Euro. We continue to manage OpEx in a disciplined way with lower spending in G&A and our client business offset by key investments in our solutions business focused on products, IT sales and services. We will be disciplined here but we are committed to making these investments while the environment allows it.

Finally, we are committed to growing operating income dollars while maintaining disciplined execution on working capital and our cost structure. With that let me turn it over to Michael.

Michael Dell

Thanks Brian. We are really excited about the growth in our commercial businesses right now and had strong showings across all of our enterprise solutions businesses; servers, networking, storage and services.

Our solutions revenue is on a $17 billion run rate, delivers gross margins in the low 30’s and now contributes more than 50% of the company’s gross margin dollars. In our commercial business solutions revenue grew 41% from a year ago and represents 35% of revenue. This is a five point mix shift from a year ago and an eight point shift from two years ago. These solutions are resonating with customers and we are winning. Enterprise is a big part of our growth strategy and we plan to fully participate here.

While this growth is important to our long-term success we are also at the front end of a powerful refresh in the corporate and public client business. We estimate that less than 5% of large commercial customers worldwide have made the transition to Windows 7 and Office 2010. We are also seeing server and storage refresh rates accelerate as customers virtualize their data centers and transition to the latest technology. Both of these trends will be powerful catalysts for Dell’s growth to help fund current and future investments.

With that let me now open to the operator for questions.

Robert Williams

Thanks Michael. Just a quick reminder to please limit your questions to one with one follow-up. Operator, can we have the first question?

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Kathryn Huberty - Morgan Stanley.

Kathryn Huberty - Morgan Stanley

At the Analyst Day last July you talked about 7% plus operating margin in a period of strong growth driven by the higher margin corporate revenues. This is the first quarter we have seen that significant mix shift away from consumer towards SMB and enterprise. I wonder if you could just comment on whether the operating leverage in the model was as you expected and if that 7% operating margin target is still a good stretch goal to think about for the back half of this year and 2011?

Brian Gladden

That is still our target. We talk about that as more of a longer-term target we are driving towards. I think as we have talked about it there is nice leverage in our business when we see the commercial business demand come back. We are seeing that. If you look at the results in the commercial businesses and LE and SMB and even public, ultimately nice leverage with the demand coming back. We have also said we are going to make some pretty significant investments in shifting the business and building out our enterprise business. I think that is a balance we are trying to work through as we move forward but the leverage is clearly there and we are still targeting the 7%.

Kathryn Huberty - Morgan Stanley

Given the strong revenue performance you had in enterprise and SMB should we expect the investments for growth in those areas to accelerate in the near-term?

Brian Gladden

I think we are being disciplined. I think if you look at how we are managing OpEx you will see the leverage we are getting with the volume growth and the unit growth but we are simultaneously executing on cost reductions in the business in places like G&A while we are investing in some of these key enterprise areas whether that is product R&D, or whether that is sales and service capabilities.

Operator

The next question comes from the line of Brian Alexander – Raymond James.

Brian Alexander – Raymond James

It seems like the strong leverage in the SMB and enterprise sectors was offset by public sector. I realize Perot has a dampening effect on the margins in that business but it looks like they would have been down considerably even excluding Perot. Could you talk about that? Is that being driven by the mix shift towards emerging markets? Can you talk about your outlook for profitability for the public sector for the balance of the year?

Brian Gladden

Perot really didn’t have a bit mix down impact on the business. As you saw, the results of the business before we acquired it, it is a 7% plus sort of operating income business. The pressure we see in public was really the softness in U.S. federal business and EMEA. I would call out specifically the U.K. government business was pretty weak. Those are businesses that are typically pretty high enterprise mix and therefore pretty high margin. That is the short-term dynamic we are managing through in the public business. Still like the profitability there and still like the growth prospects and well positioned to go forward.

Brian Alexander – Raymond James

So you think this is just a temporary low and we can get back to high single, potentially 10% type operating margins over the next 12 months?

Brian Gladden

I think we have to watch the growth dynamics in that sector. Obviously there are places where you see government deficits that are going to affect spending but we still think it is a great business and we will continue to invest there. I think there is margin upside going forward in that business.

Operator

The next question comes from the line of Richard Gardner – Citigroup.

Richard Gardner - Citigroup

I was wondering if you could talk about gross margins. I know you manage the business to the operating margin line but I think the street had perhaps expected a little bit more of a gross margin rebound given the more favorable customer mix you had in the quarter. I suspect you are going to talk about things like component pricing and maybe even the mix shift to the channel. Can you talk about whether those are the right things to think about or was there also competitive pressure in the quarter? And is mid 17’s sort of the new level to be thinking about or do you still think gross margins can get back to the 18 level or better in coming quarters?

Brian Gladden

I think you got it. We are focused on driving operating income dollar growth and we feel good about the progress we made in the quarter. We did improve margin rates by about 20 basis points versus where we were in the fourth quarter. We said we were going to move it forward. We did see the favorable mix impact of the consumer business being seasonally down but as you look at the dynamics on the commercial side of the business it was offset by strong growth in the client business within commercial which obviously within commercial is at a lower rate.

So those dynamics more or less offset each other. We also saw negative mix from the very strong growth in APJ and some of the emerging countries, India and China obviously contributing to that. Those are some fundamental dynamics we are facing. The reality is we are focused on continuing to drive operating margin back up and you will see that progress.

Richard Gardner - Citigroup

Can you specifically discuss any impact from competitive pressures or any pressures you saw during the quarter?

Brian Gladden

I wouldn’t call anything out. I think there is a lot of good demand out there. The markets are feeling better and there is good competitive dynamics out there. That is nothing unusual.

Operator

The next question comes from the line of Toni Sacconaghi - Sanford Bernstein.

Toni Sacconaghi - Sanford Bernstein

I wanted to follow-up on the previous question specifically on what you saw in components in the quarter. One factor you had highlighted last quarter was you had gotten caught in a series of retail commitments and then faced a big unexpected spike in DRAM pricing at the end of the quarter which hurt you. Ostensibly that didn’t repeat itself. Again I am kind of surprised there wasn’t more gross margin leverage as well. Can you talk about what happened in terms of components in the quarter and how that may or may not have impacted margins? Then given the strategic inventory purchases which I gather are component pre-buys can you talk about how you think components may or may not impact you in Q2?

Brian Gladden

I would say we talked about the challenge with the timing of retail matching our buys with pricing. We have more or less fixed that process in the business. So to your point that is not something we are at all calling out in the quarter and it is something I think we have managed pretty well. I would say components continue to be relatively tight. Memory has been a bit of a challenge. I think from our perspective and I think from the market’s perspective what you will hear is that will continue to be a challenge for the next couple of quarters.

What we have done is lock in supply to the point where we are generally feeling pretty good about our capability to meet our needs on the supply side. I would say that the reality is there is going to be continued pricing pressure there and components are not going to be seeing the typical deflation we have seen. We are continuing to manage through that. I think we have done a better job this quarter as far as passing that through and pricing in the marketplace and that is something we have just got to continue to do.

Toni Sacconaghi - Sanford Bernstein

On the demand side, can you comment on linearity in the quarter particularly in light of heightened concerns around macro? Particularly Europe? So was demand linear? Did it actually improve over the course of the quarter? If you look at this quarter how was linearity and if you can comment on the first 20 days of this month that would be appreciated as well.

Brian Gladden

I would say pretty linear. There were puts and takes around the world but on a global basis pretty linear demand and as we looked at second quarter we talked about in our outlook we would see the typical sort of seasonality we usually see given our exposure to the education and state government and that would say we are going to be up a couple, 2-3 points, versus first quarter in the second quarter and everything we have seen in the quarter so far supports that.

Operator

The next question comes from the line of Bill Shope - Credit Suisse.

Bill Shope - Credit Suisse

Given your investment goals and balanced against your efficiency efforts how should we think about the OpEx ratio this year? How should it trend from the levels we saw this quarter? Should we expect to see leverage here or is the focus really this year on longer-term growth investment?

Brian Gladden

I think you will see we will try and manage it in a bit of a balanced way. We are going to make the investments. There is no question. I wouldn’t expect an awful lot of leverage given that dynamic. In this market we are going to make those critical longer-term investments for the business.

Bill Shope - Credit Suisse

So with that said as a follow-up you do expect leverage this year but you don’t expect it from the OpEx ratio so implicitly you expect it to come from the gross margin line?

Brian Gladden

I think you will see some leverage in OpEx but as I said earlier we are going to continue to work to improve gross margins as well. It is all about operating income dollars.

Operator

The next question comes from the line of Jayson Noland - Robert W. Baird & Co., Inc.

Jayson Noland - Robert W. Baird & Co., Inc.

EqualLogic was strong again in the quarter. Are there any financials you can offer up?

Brian Gladden

Revenue in EqualLogic was up I think 78% year-over-year. It continues to be really a great product line. Lots of growth there. Brad is here. Maybe he can talk a little bit about it.

Brad Anderson

We had a record quarter. We continue to see good growth in all sectors. It was particularly strong in public and SMB worldwide. We are seeing increasing where we have sold one array we are seeing now the repurchases of expanding that from one to two to mobile set of arrays so now we kind of have an installed base. When we think about where we were at when we first bought them we are now with about 18,000 arrays out in the field so we have really grown that installed base.

Jayson Noland - Robert W. Baird & Co., Inc.

As a follow-up what type of overall storage attach rate are you seeing to your server sales?

Brad Anderson

We are not tracking it as server attach but we are seeing two things here though. We are seeing a large number of sales into our installed base but we are also seeing very attractive getting us into new accounts we previously weren’t in. It is expanding our reach into a set of customers we weren’t previously selling to as well.

Operator

The next question comes from the line of Stephen Fox – CLSA.

Stephen Fox – CLSA

The growth in the BRIC countries over the last couple of quarters has really picked up. Are there any one or two strategies that you particularly point to that is driving that? I know you have talked about a bunch of them over the last year but I would love to get some more detail on that.

Brian Gladden

We are seeing growth really across all four of the businesses in all of the BRIC countries. BRIC plus ten was up 57%. The ten being the next generation of significant emerging countries. So the large enterprise business was very strong. Public was pretty strong. This would have been not the strongest quarter for the public business in BRIC. SMB was quite strong. Consumer continued to be strong. Really great growth in India and Brazil. India is up 90% and Brazil is up 81%. Russia 79%.

We see a lot of growth here. Our strategies are really, really working across all of the businesses and there is also a lot of strength in the brand in these countries. So if you go to China, India or Brazil on the ground Dell has a significant presence and is really moving quickly.

Stephen Fox – CLSA

Is there any specific currency assumptions you can comment on that are baked into the numbers that we can benchmark as we go forward?

Brian Gladden

We generally don’t talk about currency a lot. As a global company we manage it. I would say we have been pretty open about the fact we generally have a longer window of hedging than most other competitors and therefore we try and manage out the volatility over a period of a few quarters. I think we have done a nice job managing it and obviously over time we have to make sure our teams can react and price appropriately given what is going on with currency over time. We really don’t like to talk about it as a major driver of the business.

Operator

The next question comes from the line of Benjamin Reitzes - Barclays Capital.

Benjamin Reitzes - Barclays Capital

Michael, your largest competitor just announced they are buying Palm and obviously we are seeing pretty explosive success with the iPad. I was wondering if you could comment a little bit more on Dell tablet and cell phone or smart phone strategy and whether any moves or recent movements with the iPad or moves by HP changed your view at all and maybe a little bit of outlook on whether you need to make an acquisition in that space?

Michael Dell

I think one of the most immediate opportunities we see with all of the users coming online is the tremendous build out of the data centers to feed all that data. We are very focused on our data center custom solutions business and providing the infrastructure to all of the content providers and telco’s that are feeding up all that data. A lot of data would suggest we are supplying about 19 of the 25 largest websites in the world and really continue to have a significant presence in that tier.

You are also starting to see us a bit in the device side. We are very much working with Android and Windows Mobile 7 and we see those platforms as more attractive alternatives to other suggestions you may have offered.

Benjamin Reitzes - Barclays Capital

With your experience in the industry what do you think of the tablet space in general? Do you think it is disruptive? Additive? Doesn’t cannibalize? Do you think it has any impact on your corporate business actually and not just consumer?

Michael Dell

I think it is pretty interesting. Whenever a new device comes along it is always kind of fun to get one and play around and kind of see what it is all about. My view is that these devices are really good for content consumption and they are not so much content creation devices. They also appear to be devices that create a whole new usage pattern and a whole new demand for data which is a good thing and they don’t necessarily replace any existing device per se.

Could you on occasion use this device instead of another device? Yes. But generally speaking the tablet form factor looks to me like a whole other device and a whole other purchase pattern.

Operator

The next question comes from the line of Maynard Um – UBS.

Maynard Um - UBS

Can you help us with the pro forma gross margin between your product and services segment? Of the $98 million how do you break those out between making some assumptions based on your previous acquisitions it looks like you might actually be seeing some lower or pressure on your services gross margin. Can you tell me how that splits out and if that is correct?

Brian Gladden

There clearly is, if you look at the reported data around our services business as we look at Perot, Perot would ultimately mix down the margin rates for our services business. At the operating income line it is basically about the same operating income or slightly better than the company. As a service asset, clearly an important asset for us but you will see some dilution in the services gross margin over time because of that.

Maynard Um - UBS

Curious about the use of cash. Does your share repurchase signal a change in your M&A strategy and could you give us any thoughts into timing of some of the potential things you had been talking about in the past?

Brian Gladden

I think we have been obviously fairly transparent on our strategic needs and I think that continues to remain a priority. I think the signal you take from the buyback would really be around our comfort that the business continues to perform well and the credit issues that we were troubled with a year and a half ago are really behind us. Then I think we have gotten comfortable with what it is we need to accomplish in that plan in terms of strategic other uses. I think that is how I would read it. Again, I would say we expect to have a relatively modest repurchase plan for the rest of the year.

As we said before and I think we said it last quarter we would expect to be somewhat balanced and like to do both of those things; make strategic investments but also do buyback.

Operator

The next question comes from the line of Chris Whitmore – Deutsche Bank.

Chris Whitmore – Deutsche Bank

You reiterated your consumer margin targets for the year. What are the top 1 or 2 levers you will pull to get there?

Brian Gladden

I think the biggest thing we have talked about is continuing to work costs in the consumer business. As we announced last quarter we have consolidated the consumer business with the SMB business and that creates for us some nice leverage on the cost structure and those businesses we have just begun to sort of realize some of those benefits. I would also say we continue to reduce the COGS and the cost of our consumer products. Those are the two biggest levers we have as we continue to grow there.

Chris Whitmore – Deutsche Bank

Can you quantify the expense reductions that are under your control that you have identified for reduction?

Brian Gladden

We talked about it last quarter. There is a couple hundred million dollar opportunity we are going after in terms of the consolidation of those two businesses.

Operator

The next question comes from the line of Mark Moskowitz - J.P. Morgan.

Mark Moskowitz - J.P. Morgan

I want to understand more the gross margin dynamics in the commercial business. Just given the comments earlier about the Nehalem and Westmere boxes being sold with higher ASPs and the denser configurations. In the quarter reported should we think about that then as maybe offsetting lower margin contribution from the client business as that ramps? What happens longer term if the client starts to really see a refresh cycle pick up? Will that overcome or offset these better margins in the server business?

Brian Gladden

I do think that is one of the short-term dynamics we are facing into that there will be strong growth on the client side of our commercial business. We think that is a great thing. That for us creates obviously scale. It obviously creates opportunities to attach and sell other products that are very high margin. That is just a dynamic we are going to face just in the reality and it is going to drive more operating income dollars for the company. It may create in the commercial business some pressure on gross margins. I think that is okay. I think that has been the long-term direction we are driving and continuing to grow our enterprise business to 38% that is the big measure of success in terms of our transformation and I think it is important we make progress there too.

Mark Moskowitz - J.P. Morgan

As a follow-up, just given the momentum you are seeing in BRIC and APJ in particular should we think about Dell getting more acquisitive from the services perspective next to layer in to that momentum?

Michael Dell

We wouldn’t want to signal acquisitions before they occurred. Just generally not a good strategy. Certainly as Brian said we will continue to be acquisitive and there are certainly capabilities we will want to add to our portfolio.

Operator

The next question comes from the line of Aaron Rakers – Stifel Nicolaus.

Aaron Rakers – Stifel Nicolaus

A follow-up question on that last one. When I look at your consumer gross margin or implied gross margin trends given your filing disclosures over the last couple of quarters it looks like it has come under quite a bit of pressure. Could you talk about our consumer segment gross margin trends here in the context of getting back to your 7% kind of targeted overall corporate operating margin level?

Brian Gladden

I don’t think we publish or share any of the consumer gross margin details. You would see operating income on the consumer business and again I think that has been relatively consistent in something under 1% for the last year with the exception of the second quarter last year. I think the context and the framework we have created for the 7% operating income would count on the consumer business in the 2% plus sort of range and I think we can get there with that. Again, the consumer business is important for us from a scale standpoint but we think it can generate 2% plus kind of operating income.

Aaron Rakers – Stifel Nicolaus

When you talk about the Nehalem EX and Westmere platforms it looks like your server business was down slightly on a sequential basis. Your closest peer reported something like 4% sequential growth. I guess the question would be did you see any type of pause or deferral in terms of spending with regard to the Nehalem EX platforms and the Westmere platforms coming out in this last quarter?

Brian Gladden

No we didn’t. I think typical seasonality is down quarter-over-quarter and in fact we were essentially flat. I think maybe it rounds to minus 1 here. No, we didn’t see a pause throughout that period for both Westmere and Nehalem Ex. Nehalem EX since it goes into the four sockets you are seeing now the start of the qualification and validation for that. I think you are going to see continued pick up on the Nehalem EX as now people get past their own internal qualification processes and move more into production buying pattern.

Operator

The next question comes from the line of David Bailey - Goldman Sachs.

David Bailey - Goldman Sachs

Inventory was up 12% or so quarter-over-quarter on flat sequential revenue. I know you said you made some strategic purchases in the quarter. Should we expect this trend to continue as we go forward or should inventories start to track revenue more closely?

Brian Gladden

I think we feel pretty good with the level of strategic inventory we have right now. I wouldn’t expect a dramatic change in that. Reserve the right given the component kind of environment to maybe do something there but I think the other dynamic that is going on obviously as we see the growth of the retail business and as we see the ability to put more product on the [water]. Those are things that are obviously putting pressure on inventory. I think we have managed that pretty well in the quarter. That was a minimal impact. Again, I think you can expect it to be pretty flat. We are trying to manage it around the 8-9 days right now.

David Bailey - Goldman Sachs

On the services side you said you saw discretionary and outsourcing contract flows start to pick up a little bit. I was wondering if you could give a little more detail on that either by industry vertical or geography and as you see more new contracts signed does that put some gross margin pressure on as those contracts start up?

Brian Gladden

To the second part yes. As you start up and see some growth come back to that part of the business the initial economics aren’t terrific necessarily as you start up these contracts. We are seeing a good pipeline and some nice return to growth there. Healthcare is one area that I would call out we would say it has been especially strong from a vertical market standpoint.

Michael Dell

There is a significant amount of activity among community hospitals, for example, in the United States that are implementing hospital information systems. We have lead share in that sector and we think there is going to be a very robust environment for that kind of IT activity.

Operator

The next question comes from the line of Shannon Cross – Cross Research.

Shannon Cross – Cross Research

If you could talk a little bit about cash flow from the standpoint of what you saw puts and takes, clearly inventory was used this quarter. More importantly sort of as we go through the year could you give us an idea of how we should think about operating cash flow quarterly and things to keep in mind from a seasonality standpoint?

Brian Gladden

I think the first quarter as we said is generally our weakest cash flow quarter. Obviously one of the things we do is have our bonus payout and that was a driver in the quarter. Working capital we have said we expect to continue to keep that in the mid 30’s, negative mid 30’s so not a dramatic move one way or another. You may see a couple of days here and there but that is generally pretty solid.

We generated $4.3 billion of free cash flow for the last four quarters on a rolling basis. Something similar we would expect this year. There may be some seasonality as it relates to linearity in our revenue growth that affects working capital but I think about it on a rolling 12-months kind of basis and that is the best way to think about it.

Shannon Cross – Cross Research

Can you talk a bit about again having been through some of these refreshes before with Win 7 it seems 5-8% of PCs have been refreshed at this point in time. I know you have talked about this before but how you see this rolling out? More importantly how we should think about ASPs and given what is going on in the component side and what is required for Win 7, just anything you can give us because again there is a lot of used equipment out there clearly that people can kind of pull in and replace so it is kind of a different times. Anything you could give us there would be helpful.

Michael Dell

I think it is a fairly unique time because the age of the installed base is as great as it has ever been and there wasn’t really a catalyst or series of catalysts to upgrade and now we believe there is. We are seeing significant projects and conviction among customers. What I would also tell you is there is a real shift towards more of a data center based client model in the various forms whether it is client virtualization. So there is a shift in where that spend is going to more server storage, with our Power Edge EqualLogic platforms. So far the dynamic that Brian described I think you are going to see that play out here where we have increased operating income from growth in the client business but that obviously pressures gross margin somewhat. So operating income growth is kind of what we are focused on here. I do think you will see the server and storage businesses continue to grow faster. Services as well.

Operator

The next question comes from the line of Rob Cihra – Caris & Company.

Rob Cihra – Caris & Company

This is sort of following on the last point but you do talk about corporate recovery just beginning and getting better through the second half and in fact you already had the third quarter of sequential improvement in corporate. I am curious if we are rebounding from an awfully weak several quarters why the Q2 outlook calling for seasonally slower, large corporate demand? If we were really rebounding and refreshing wouldn’t we be able to have sort of a better than seasonal corporate outlook in the second quarter?

Brian Gladden

I think we are building off of a pretty nice rebound we saw even into the fourth quarter. We talked about a bit of a budget flush and we saw basically almost counter seasonal growth or flat revenue into the first quarter. I think it has been a little bit better than we expected and better than we anticipated and talked about but I do think you will see the typical slow down in terms of large corporate transactions during the course of the summer, especially in Europe. That is just a dynamic that you face. So, I just think that is the reality of the market.

Operator

The next question comes from the line of Jeff Fidacaro – Susquehanna Financial Group.

Jeff Fidacaro – Susquehanna Financial Group

I am wondering if you can give us a little bit of color on the general outlook on the growth trajectory for notebooks and any comments specifically within Europe. Some of the competitors have been talking about having to possibly raise prices in that region. If I take a look at just this quarter the implied ASP was down a bit on your notebook space.

Brian Gladden

I think general trajectory the market has generally been obviously the growth is coming back on the commercial side. Average selling prices for us have been more stable obviously than they were last year on the notebook side as well as desktops. When you talk about Europe clearly as you look at currency moving through the system over a period of time depending upon hedge windows and timeframes for anybody, for any of the competitors to protect margins there they are going to have U.S. dollar exposure and selling into a Euro market they are going to have to raise prices ultimately. I think that is just the reality we are going to see and over the next couple of months when you see the U.S. dollar and Euro continuing the current relationship I think that is just the reality. It probably will ultimately affect demand.

Operator

The next question comes from the line of Louis Miscioscia – Collins Stewart LLC.

Louis Miscioscia – Collins Stewart LLC

My question is actually on cloud computing. When I do some checks I do hear that a lot of folks are choosing Dell Service for that. Can you mention, are you actually using racks or blades more for that? Is this starting to be a meaningful portion of your business and are you specifically customizing off the normal standard sheet that you have for different customers with that?

Brian Gladden

We formed a custom data center solution group about 2.5 years ago. I think Mike alluded earlier most globally the largest data centers moving this kind of hyper scale cloud computing model is deploying on those platforms. Then we are winning more than our fair share of that volume and are now kind of leading in providing those class of solutions. That business continues to be very strong. It was particularly strong this quarter and it has kind of improved quarter-over-quarter for the last several quarters.

What we have done this quarter in addition to that is there is a lot of unique learning’s from that offering and we have now taken those learning’s and created a more standard line of a product called the Power Edge Series C to take those to be able to transfer those learning’s into a tailored offering for more of the Fortune 500 type of accounts that are looking at putting in their own private clouds. So we think that is going to be really a strong lineup and we just launched that in mid-March so we think that is some upside going forward.

Louis Miscioscia – Collins Stewart LLC

On desktops, a little surprised to see obviously desktops growing faster quarter-over-quarter than notebooks. Maybe you could give us some thoughts as to what dynamics are going on underneath that.

Michael Dell

I think that is the refresh cycle and obviously Q4 is a seasonal period where there is a lot of consumer notebook purchases.

Robert Williams

Thanks everyone. We will talk to you soon and look forward to seeing you here in Austin next month.

Operator

Ladies and gentlemen this concludes today’s conference call. We appreciate your participation. You may now disconnect.

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